Public Authorities’ Relations to the Banking Sector

Why is it that governments of all kinds and in all places concern themselves with the well-being of banking and financial markets and institutions? Obviously, there are a variety of reasons, some of them at the micro-level, such as protecting individual investors or depositors, trying to provide for a reasonable degree of fairness in the market-place and so on. But, at a macroeconomic level there are three factors that really stand behind public policy concerns with the well-being of financial institutions and markets: 1. It is widely recognized — sometimes implicitly, sometimes explicitly — that one of the central roles of the banking system is to provide for the efficient allocation of savings and capital resources. At times, that aspect of the financial system does not get as much attention as it deserves. Yet, banking and finance do not exist unto themselves or in a vacuum. They exist because they have an essential task, and the reason we care so much is that to the extent the banking and financial system does that job well, it spurs the life-blood of economic growth; capital formation, productivity gains and rising standards of living. 2. Chapter 10 of this volume has pointed out the connection between macroeconomic stability and the stability of the banking and financial system. But the reverse is also true in that if there is no essential stability and continuity in the banking and financial system there will be no economic stability more generally — the two go hand-in-hand. And that, I think, is the second macroeconomic reason why we care.